New Indiana Nexus Tax Law Is Bad All Around

Back in April with very little fanfare (or public comment), Indiana passed a law requiring out of state merchants to start collecting sales tax on online purchases made by Hoosiers. Although affiliate nexus legislation had been proposed in the past by Democrats, Republican State Senator Luke Kenley always made sure it was shut down. Now Kenley was one of the driving forces behind the new economic nexus tax. I’ll break down what it entails and why it is a bad idea for Indiana right now.

The Law

House Bill 1129 provides that an out of state merchant must collect sales tax on Internet purchases if the merchant either makes 200 or more separate transactions in Indiana in a year or their gross revenue from Indiana sales exceeds $100,000 in a year. The law took effect July 1, 2017.

The Rationale is Wrong

First of all, local merchants are not at any real disadvantage based on the tax issue. The Performance Marketing Association recently surveyed over 750 online shoppers. Only 1% said that one of the top reasons that they shop online is to avoid taxes. That means that at most, local merchants are missing out on 1% of their sales based on the sales tax issue. Conversely, they receive a lot of local benefits such as police and fire protection, roads, etc. I don’t want to see the mom and pop store go out of business, but if they do, it won’t be because they have to collect taxes on purchases.

Second, those numbers of projected tax revenue loss would be MUCH less than the 2012 projections. Amazon started collecting taxes in Indiana as of January 1, 2014. Yes, online shopping numbers have gone up since the study in 2012. However, much of that is from companies with physical locations in Indiana who are already collecting taxes (Best Buy, Walmart, etc). In fact, looking at Slice Intelligence’s numbers for the 2016 holiday season, at least 9 of the top 10 merchants for online spending were collecting taxes–for a total of over 60% of shopping. Imagine what those numbers look like when you throw in all of the other brick and mortars plus the merchants who were already voluntarily collecting.

We Have a Lot to Lose Now

The legislators know Indiana is in for a fight. South Dakota is already undertaking substantial judicial action to enforce their very similar law. In fact, our legislators specifically said that they anticipate the impending litigation. How much money will it cost taxpayers to defend this new law rather than waiting for the Supreme Court to take up the South Dakota case or for Congress to pass one of the several bills currently proposed that would end this whole thing? Attorneys will be the biggest beneficiary of this law for quite some time.

In addition to the money defending the law, the state is ALREADY losing income tax money as a result of passing it. Zulily sent out an email to all of the affiliates in the state saying that they are dropping them. Which other merchants will follow suit? The state just lost any income tax from affiliates in programs that drop any type of nexus state affiliates.

Taking that a step further, a business like mine (Sunshine Rewards) will now lose customers in general because I have lost a merchant like Zulily. So not only do I lose the Zulily revenue but I also lose all of the business of my members who want to shop through a website that works with Zulily. And for every dollar Sunshine Rewards loses, the State of Indiana loses the income tax on it. Multiply me across all of the affiliates in Indiana and we’ll see an immediate drop in tax revenue starting with our next quarterly filings.

Some of my biggest competitors have either moved out of the country or are owned by companies outside of the country–in many cases to avoid state issues like this. How is that good for Indiana or Americans in general?

Businesses came to Indiana after Illinois passed an affiliate nexus tax. Will those same businesses now make the decision to leave Indiana as a result of our law?

Right Motives, Wrong Execution

I understand that Indiana wants to capture more tax revenue (ironically it was the Republicans who passed this law despite always saying “no new taxes”). However, this law was passed without any real understanding of the potential implications for all of the affiliate marketers in the state. We were never given the chance to plead our case or even explain the ramifications. In trying to save the “little guy” small businesses on Main Street, they harmed the “little guy” small businesses run by work-at-home moms and dads, retirees, and other entrepreneurs. From a pure numbers standpoint, this law will cost Indiana a lot of money in the short-term with only the HOPE that it may make the state money in the long-term.

Comments

Having the facts spread out like this really helps you to generate your own opinion on the matter. It seems as though they meant well, but went about doing this the completely wrong way. This happens much too often with policies and laws like this, where the public is shown one face of the argument and not shown the other. I appreciate your detailed explanation of what the law entails and what it could mean for Indiana. Best wishes.